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MEMC Electronic Materials

MEMC Electronic Materials. Michael Bellisario Zach Chen Suyang Sean Hong Vignesh Murali Ron Yang Tuesday, April 13, 2010 Ticker: WFR (NYSE). MEMC Electronic Materials. Purchase History Business Overview Industry Analysis SWOT Analysis & Porter’s Five Forces Competitor Analysis

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MEMC Electronic Materials

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  1. MEMC Electronic Materials Michael Bellisario Zach Chen Suyang Sean Hong Vignesh Murali Ron Yang Tuesday, April 13, 2010 Ticker: WFR (NYSE)

  2. MEMC Electronic Materials • Purchase History • Business Overview • Industry Analysis • SWOT Analysis & Porter’s Five Forces • Competitor Analysis • Multiples Valuation • Historical & Recent Stock Performance • Financial Statements Analysis • Management Assessment • DCF Valuation & Recommendation

  3. Purchase History • March 2008 – Bought 200 shares @ $78.15 • December 2008 – Bought 400 shares @ $14.43 • Cost basis - $35.67/share • April 9, 2010 Closing Price - $15.96 • Market value of holding (600 shares) = $9,576 • 2.9% of total portfolio, 8.5% ex-cash (not including BGC) • Unrealized loss of 55.3% or $11,826 • Recommendation = HOLD

  4. Business Overview • MEMC designs, manufactures, and sells silicon wafers • Semiconductor wafers and solar wafers • Solar “projects” through Sun Edison • Based in St. Peters, MO • One of four wafer companies with 10%+ market share • NYSE Ticker: WFR

  5. What is a wafer? • Wafers are the foundation on which the world’s semiconductors and solar cells are built • All the processes of a micro device are conducted on a wafer • Increased wafer sizes have increased device performance and reduced production costs 50mm, 100mm, 150mm & 200 mm wafers (top) 45nm (bottom)

  6. Geographic Presence Source: 2009 Annual Report

  7. Business Overview • Semiconductor Materials ($7B market size) • Continuous technological development and product innovation • Solar Materials ($10B market size) • Intense cost pressures and competition from thin-film technologies • Solar Energy ($39B market size) • Very competitive in terms of pricing and continuing evolution of technologies

  8. Historical Demand Semiconductor

  9. Forecasted Demand

  10. Sun Edison Acquisition • November 20, 2009 • Vertical integration strategy – closer to end customer • North America’s largest solar energy service provider • Development of solar power plants and commercialization of solar energy • Solar project “manager” • Construction & selling solar projects • Selling electricity • Ongoing maintenance & solar services

  11. Sun Edison Acquisition • Business segment realignment • Solar Materials Materials Business • Semiconductor Materials Solar Energy (Sun Edison) • Sun Edison will retain name, become subsidiary of MEMC • $314.6 million purchase price • Negative initial reaction by market • $285 million of goodwill, $300+ million of debt • Increased customer base • Kohl’s, Staples, City of San Diego, Xcel Energy

  12. Sun Edison Acquisition • Global Solar Capacity • Expandable Market ROW Japan China India U.S. Sun Edison Canada France Italy Spain Germany Source: 2010 Capital Markets Day Presentation

  13. Sun Edison Acquisition • 100+ Mws under management • 3 billion kw/hrs contracted for 20 years • 2009 accomplishments: 40 Mw, 135 systems installed • 2010 goals: >100 Mws installed, 1 Gw backlog • MEMC’s growth going forward/highly uncertain though • 20-yr contract, price pegged at or below cost of grid power • Economically sensible only when there are substantial subsidies (Spain)

  14. Sun Edison Acquisition • Customer Success Story – Kohl’s • Largest rooftop solar rollout in U.S. history • System Type: Roof-mounted solar panels • System Size: 25 megawatts across 65 sites in California • Annual Savings: Reduced energy operating expenses • Capital outlay for Kohl’s: $0 • System will provide 20-30% of each store’s power

  15. SWOT Analysis - Strengths • 50 years in the wafer industry • Wide range of products • Diversified geographic presence • Sales in U.S. , Taiwan, China, Europe • Strategic long term contracts • 10-yr contracts worth about $10-12.5 billion • Strong R&D • $40 million in 2009

  16. SWOT Analysis - Weaknesses • Operating disruptions • Equipment failure in August 2009 at Pasadena, Texas facility  decreased sales and gross margins • Low operating efficiency • Declining asset turnover • Reduced financial flexibility • Significant capital diverted to Sun Edison business

  17. SWOT Analysis - Opportunities • Long-term growth in renewable energy • Potential increase in government support and investor demand as oil/commodity prices rise • Rebound in semiconductor shipments worldwide • Solar projects become more attractive as costs come down due to technology improvements

  18. SWOT Analysis - Threats • Government subsidies • Sun Edison would not be profitable without favorable government subsidies • Concentration of the buyers • One customer in Materials Business accounted for 23% of 2009 revenues • Top three customers accounted for 39% of 2009 total revenues

  19. Porter’s Five Forces

  20. Competitors • Based on the following criteria: • Initial list of competitors provided by MEMC’s 10-k • Biggest competitors from each segment (solar wafers, semiconductor wafers, and solar projects) • Attempted to match revenues and markets

  21. Trina Solar • Integrated solar-power products manufacturer • Based in China with customers throughout the world • Major competitor of MEMC in Germany, Spain, Italy, and the United States • Currently produces more solar energy (megawatts) than MEMC

  22. Shin-Etsu • Japanese-based chemical manufacturing company • Wafer manufacturing = 40% of revenues, 41% of total assets • Wafer sales 3x greater than MEMC’s wafer sales • Net income fell 60% last year

  23. SUMCO • Japanese-based manufacturing company mainly engaged in silicon production • Also produces silicon wafers for solar batteries • Similar in size and revenues to WFR • Revenues decreased 44% due to lower demand in North America and Japan (~85% of total revenue)

  24. SolarWorld AG • German-based manufacturer of silicon solar wafers, solar cells, and solar modules • Competes with WFR in the solar cells and panels segment • Top industry participant • 38% drop in net income year-over-year

  25. Sun Edison Competitors • First Solar • Manufacturer of solar modules and solar power systems based in Tempe, AZ • Acquired OptiSolar to increase exposure to solar power project development • Revenues of $2.7B (66% increase year-over-year) • SunPower • Producer of high performance solar electric power technologies (solar panels & invertors) • Acquired Tilt Solar in 2009 • Revenues of $977M

  26. Multiples Valuation • More weight toward P/B and P/S as they were more stable than EV/EBITDA • Out of the eight competitors, most had negative earnings history; therefore we used forward P/E

  27. Multiples Valuation

  28. Historical Performance Massive cost cutting, profitable by FY2003 Solar wafer introduction TPG bailout, avoided bankruptcy CEO resigns Source: Yahoo! Finance

  29. Recent Performance Q3 results, Sun Edison announcement Q2 results, sales at low end of guidance Positive 2010 guidance, Sun Edison clarity New CEO New CFO Market bottoms Stock bottoms Source: Yahoo! Finance

  30. Profitability Proliferate market resulted in oversupply

  31. Profitability Management failed to control SG&A when sales fell

  32. Liquidity Hold large amount of cash/buffered the impact of ST debt

  33. Efficiency Inventory is highly correlated to sales

  34. Efficiency Declining operating efficiency

  35. DuPont Analysis

  36. DuPont Analysis

  37. Management Assessment • Revised Q3 guidance (Sept.): $285-315 million in revenues, gross margins in “mid to high single digits” • Q3 actual: $315 million in revenues, gross margins 6.6% • Q4 guidance (Oct.): $310-350 million in revenues, gross margins 10-14% • Q4 actual: $357 million in revenues, gross margins 14.9% • Capital Markets Day presentation – CFO said he would release updated financials in one month; EDGAR filing in exactly one month

  38. Revenue Assumptions

  39. Discount Rate Calculation Goalpost cost of equity = 15.5% Adjusted Discount Rate = 15%

  40. DCF Analysis • Current stock price: $15.96 • 15% discount rate • 4% growth rate • DCF price: $12.40

  41. Recommendation • HOLD current 600 shares • Fair market value = $12.40 (DCF) - $13.21 (Multiples) • Plus $1.70/share in excess cash & ST-investments • High-low yearly price change = 108% • Fair market range = $8.30 - $17.20 • Current market price = $15.96 • What to watch for: • Materials Business margins/pricing pressure • Government subsidies • Sun Edison ramp-up/profitability/transparency

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